But there are signs of a slow recovery in Europe and the United States and that's good news for Australia.

The local economy is still comparatively strong, with the inflation figure out this week showing the carbon tax has made little impact on prices.

Saul Eslake is the Australian economist for Merrill Lynch and he joined me from Melbourne.

Saul Eslake, the latest CPI figures have inflation continuing to be low. What does that mean for the economy?

SAUL ESLAKE, AUST. ECONOMIST, MERRILL LYNCH: I think it attests to the impact that the strength of the Australian dollar is having in keeping inflation low, something Australia hasn't been able to do during previous commodities booms. Of course, the strength of the dollar is a problem in many other respects, but from a contribution it makes to containing inflation and keeping downward pressure on interest rates, it has been very helpful.

LEIGH SALES: Overall is a strong dollar a net positive or net negative?

SAUL ESLAKE: It depends where you sit. It has been very good for consumers. Indeed, I'd argue that it has been one of the main means by which ordinary Australians have derived some benefit from the commodities boom since most of us don't work for mining companies, most of us don't directly own shares in BHP or Rio Tinto and the like, but because the strength of commodity prices has contributed to the strength of the dollar, it's made possible lower interest rates than we would otherwise have.

Indeed, many in industry would argue it's made lower interest rates necessary as well as desirable and of course part of the problem from the point of view of many in business is that the lower interest rates haven't thus far worked to stimulate increased spending and borrowing in the way that history would suggest that they might.

LEIGH SALES: Given that, are interest rates going to go any lower?

SAUL ESLAKE: I suspect they probably will, especially if the Australian dollar stays at anything like the levels it's been in recent months. I mean, it is a puzzle to the Reserve Bank and others why, despite interest rates now being more than a percentage point lower than they were 18 months ago, despite commodity prices in most cases being close to 20 per cent lower than they were in mid 2011 when they peaked, the dollar is still virtually unchanged from those late 2011 levels.

And now that we're approaching the peak of the mining investment boom, after which some of the inflationary pressures potentially associated with that investment boom ought to fade, the persistent strength of the dollar is starting to become much more of a problem and less of an advantage than it had been while the investment boom was ramping up.

LEIGH SALES: What sort of impact are we seeing on the CPI from the carbon tax?

SAUL ESLAKE: Very little thus far. I mean the headline impact of around 0.7 of a percentage point that had been forecast by the Treasury ahead of the commencement of the carbon tax looks to have been about right. The impact on the underlying inflation rate of about a quarter of a percentage point that Treasury forecast looks to have been about right.

And in the December quarter figures there wasn't any obvious pass through of second round effects. Indeed, utilities prices were actually down slightly in the quarter, although they're obviously up compared with four quarters ago. And I think as far as the inflation rate is concerned, there haven't been any bigger effects from the carbon tax thus far than were initially expected.

LEIGH SALES: Today we've seen the International Monetary Fund revise its global economic growth prediction for the year slightly downwards but it is still pretty healthy at 3.5 per cent. Does that mean that the US and Europe are well on the path to recovery or is Asia driving that growth?

SAUL ESLAKE: I think all of those things are largely true. We've seen some encouraging signs out of the US housing market. There are encouraging signs about US manufacturing industry, partly aided by the increasing availability of cheap shale oil and gas. We've seen things not get any worse in Europe as far sentiment and confidence is concerned.

But I guess what you'd say looking at the world economy at the beginning of 2013 is that there appear to be fewer downside risks that there were six months ago and there are some glimmers of light that give market participants hope that 2013 could turn out to be a better year than 2012 was.